Macroeconomics

Output Gap The output gap is the difference between actual economic output and potential output. A positive gap signals overheating and inflation risk; a negative gap signals slack and deflation risk.

Output Gap as a Recession Indicator An output gap recession indicator reveals how far actual economic output falls below its potential, signaling slack and weakening demand ahead of or during downturns.

Output Gap Explained How the output gap measures the difference between actual and potential GDP, signaling where the economy sits in the business cycle.

Output Gap in a Small Open Economy How trade openness and capital mobility reshape the output gap concept for smaller economies, affecting inflation dynamics and policy effectiveness.

Output Per Worker A measure of labor productivity reflecting the economic output generated by each worker in a given period.

Overheating Economy: Definition, Causes, and Warning Signs An overheating economy runs output above potential, triggering inflation and asset-price bubbles. Learn what causes overheating and how central banks respond.

Owners' Equivalent Rent Owners' equivalent rent is the estimated rent homeowners would pay if they rented their own home. It is the largest component of CPI and is how the BLS measures housing inflation.

Owners' Equivalent Rent in CPI What owners' equivalent rent is, how the BLS estimates it, and why this single shelter component drives much of the measured inflation in the Consumer Price Index.

Paasche Price Index A price index weighted by current-period quantities that systematically understates inflation but requires real-time consumption data.

Part-Time for Economic Reasons: Measuring Involuntary Underemployment The BLS category of workers held to part-time schedules due to slack demand; a key component of the U-6 unemployment rate and an indicator of labor market slack.

PCE vs CPI: Which Inflation Measure Does the Fed Target? Why the Federal Reserve uses PCE inflation rather than CPI as its official 2% target, and how the two indexes diverge in practice.

Peak Cycle The turning point in the business cycle when economic expansion reaches its maximum before contraction begins.

Personal Consumption Expenditures Price Index The PCE price index measures inflation in consumer spending. It is the Federal Reserve's preferred inflation metric and covers a broader basket than CPI.

Phillips Curve The empirical relationship between the unemployment rate and the inflation rate, central to monetary policy design.

Phillips Curve Flattening Why has the Phillips curve flattened? The empirical weakening of the inflation-unemployment trade-off since the 1990s and competing explanations.

Physical Capital vs Human Capital in Economic Growth Compares how physical and human capital drive economic growth, why their returns differ, and what augmented Solow models reveal about their relative importance.

Political Business Cycle The pattern where incumbent governments stimulate the economy before elections to boost re-election chances, then tighten after winning.

Population Growth and the Steady State: What the Solow Model Predicts How faster population growth dilutes capital per worker in the Solow model, leading to lower steady-state income per capita and explaining persistent income gaps.

Potential GDP Potential GDP is the maximum level of output an economy can produce without triggering unsustainable inflation. It represents the economy's trend or full-capacity level.

Poverty Trap: How Low-Income Economies Get Stuck A poverty trap is a self-reinforcing cycle where low income leads to low saving and investment, which prevents capital accumulation and keeps productivity low. Breaking free requires external resources or sharp productivity gains.

Price-Level Targeting vs Inflation Targeting How price-level targeting and inflation targeting differ: the former commits central banks to correct past misses; the latter lets them ignore them.

Prime-Age Labor Force Participation Prime age labor force participation rate focuses on the 25–54 bracket to measure true labor market health without retirement and schooling noise.

Prime-Age Male Labor Force Participation Decline The long-run fall in labor force participation among men aged 25–54 reflects occupational shifts, disability, opioid use, and declining opportunity.

Producer Inflation Price changes at the wholesale level before reaching consumers, tracked by the Producer Price Index.

Producer Price Index The Producer Price Index (PPI) measures inflation in prices paid by firms for inputs — raw materials, intermediate goods, and finished goods before they reach consumers.

Production Approach to GDP Measuring GDP by summing value added at each production stage to avoid counting intermediate goods twice.

Productivity Productivity measures how much economic output is generated per unit of input — typically output per hour of labor. It is the primary driver of long-run economic growth and rising living standards.

Protectionism Government policies that favor domestic producers through tariffs, quotas, and subsidies to shield them from foreign competition.

Purchasing Power Parity GDP Explained Learn why economists adjust GDP for purchasing power parity across countries and how PPP figures reveal living standards better than market exchange rates.

Purchasing Power Parity: How to Compare Economies Across Countries Purchasing power parity explained: a method to adjust GDP figures for local price levels, showing what money can actually buy in each country.

Quality Adjustment in CPI Methodology for accounting for improved product quality in the Consumer Price Index to avoid overstating inflation.

Quality-Ladder Growth Model The Aghion-Howitt framework where growth proceeds through step-wise innovations that each obsolete the previous best product.

Quantity Theory of Money The classical proposition that the long-run price level is proportional to the money supply, linking money growth to inflation.

Quit Rate The share of workers voluntarily leaving their jobs, a leading indicator of worker confidence, wage pressure, and labour-market tightness.

R&D Spillovers and Economic Growth How knowledge spillovers from research and development create social returns that exceed private returns, shaping optimal innovation policy and endogenous growth.

Ramsey-Cass-Koopmans Model The growth framework that extends Solow by replacing the exogenous savings assumption with household intertemporal utility maximisation.

Real Business Cycle Theory A framework explaining economic fluctuations as rational responses to technology shocks rather than market failures.

Real Effective Exchange Rate and Export Competitiveness How the REER adjusts for inflation differences to measure true export competitiveness, and why nominal exchange rates can mislead.

Real GDP Real GDP is the total market value of goods and services produced within a country, adjusted for inflation to constant prices. It measures true economic growth, not merely price increases.

Real GDP Growth Rate The inflation-adjusted percentage change in an economy's total output of goods and services over a specified period.

Real GDP per Hour Worked as a Productivity Measure How real GDP per hour worked measures labor productivity and why it's preferred over GDP per worker.

Real Interest Rate vs Nominal: How Inflation Changes the True Cost of Borrowing Real interest rate strips inflation from the nominal rate to show the true cost of borrowing and the true return on saving. The difference is critical to investment and policy decisions.

Real vs Nominal GDP Explained with an Example Real vs nominal GDP example shows how inflation distorts headline figures; using a price deflator reveals true economic growth without the noise of rising prices.

Real vs Nominal Interest Rate: Key Differences How real and nominal interest rates differ, how to calculate real rates using the Fisher equation, and why the distinction matters for borrowers, savers, and policymakers.

Real Wage Cyclicality Over the Business Cycle Real wage cyclicality: whether wages rise during booms and fall in recessions, composition effects, and why the pattern differs from simple theory.

Real Wage Rigidity The resistance of inflation-adjusted wages to fall, even when labour-market conditions would suggest downward pressure.

Recession A recession is a significant contraction in economic activity—production falls, unemployment rises, incomes decline. The popular rule is two consecutive quarters of falling GDP; the official definition (NBER) is broader and focuses on a broad-based decline across multiple indicators.

Relative Price Change vs Inflation: What Is the Difference? A relative price change shifts costs for one good while inflation raises prices broadly. Learn how to distinguish them and when one seeds the other.

Remittances and the Current Account How worker remittances affect the current account under secondary income, and why they dominate smaller and developing economies' balance of payments.

Rent Inflation vs Owners Equivalent Rent: How CPI Counts Housing Rent inflation vs owners equivalent rent explains how CPI measures housing costs—one tracks tenants, the other imputes owner-occupant rent—creating measurement lag that delays shelter inflation signals.

Reservation Wage A reservation wage definition in economics: the minimum wage threshold at which a job seeker accepts a job offer instead of continuing to search.

Retail Sales Momentum Growth in consumer spending at brick-and-mortar stores and online, a leading indicator of consumer health and economic momentum.

Revaluation vs Devaluation: Trade Effects Compared How upward and downward adjustments to a pegged exchange rate affect export competitiveness, import prices, and the current account differently.

Rolling Recession by Sector A rolling recession moves sequentially through individual industries rather than striking the whole economy at once, with some sectors contracting while others still grow.

Romer Growth Model Endogenous growth theory explaining long-term productivity growth through innovation and research.

Sacrifice Ratio The amount of output lost per percentage-point reduction in inflation during a disinflation episode.

Sahm Rule: The Unemployment Threshold for Recession Identification The Sahm Rule signals recession onset when the three-month average unemployment rate rises 0.5 percentage points above its lowest level in the past 12 months.

Satellite National Accounts Supplementary accounting frameworks extending GDP to capture household production, environmental degradation, health, and social capital.

Scale Effects in Growth Models: What They Are and Why They Matter Examines scale effects—the prediction that larger economies grow faster—and how modern endogenous growth models address this empirical puzzle.

Second-Round Inflation Effects How initial price shocks from supply disruptions trigger wage demands and broader price-setting behaviour, embedding inflation into the economic system.